the Air Vent

Because the world needs another opinion

Archive for November, 2015

Inequality

Posted by Jeff Id on November 7, 2015

I haven’t been blogging much obviously.  Life is more than a little busy these days.  The boys are getting older and work is getting busier.  With the continuing climate mantra of ridiculous papers studying asinine things like kangaroo farts, calls for cow methane regulation, and the continued failure of the sea ice to melt, climate science has gotten so literally stupid I don’t want to waste my mind on it.   We don’t live forever after all and it seems that skeptical bloggers are hardly required to point out the political idiocy so rampant in the field.  I’m living a rather unusual experience these days as we have made the transition from a startup to a smallish company and now growing to a larger more profitable organization.   Every entrepreneur I’ve met seems to take a different path.  Nearly all larger success stories are generous folks with big hearts who thrive on honesty and doing what you say you will.  I have also noticed that beginning an organization from a cashless unfunded start up gives us a perspective on business that is considerably different from the executives we deal with in large organizations.  On the journey, my partners and I have learned a great deal about regulations, taxation, costs, and unique legal liabilities for others actions afforded today’s business owners.   As you may guess, a lot of it is not good for proper function of a business.

I just watched most of the show Inequality for All by Robert Reich, Bill Clintons labor secretary.  It attempts to make a compelling argument that income inequality is the key problem America faces.   Robert Reich is certainly a good speaker and he had several CEO’s and wealthy investors who were also well spoken on the subject.  I do agree with him that Americans should make more in their jobs, however Robert blamed the discrepancy on low top income tax rates, globalization, technology and too little government investment in education.  While he discusses other pressures he sort of brushes them to the side without much additional comment and instead income tax and education were keys for him.

I can’t really claim the political credentials of a man who spent the majority of his career in politics or making speeches, but I can claim to know what happens in our world, and in our actual functioning business – and I think our reality should carry a bit more weight than a man who has spent his entire life as a professional speaker who has not created jobs or products.

First, lets talk about higher education because America’s once great higher education system has completely lost its way.   I’m not talking the costs right now, but rather the institutions themselves have become centers for the lazy.   They have less to do with transferring knowledge to students (the product) and more to do with grant taking and (everyone gets a ribbon) self-congradulatory accolades for the anointed.   Even worse, they have devolved into political indoctrination farms for the economically radical left-wing folk.

Now with respect to cost, the subsidized University of Michigan costs $30,000 US per year to attend.  The student might have 12 classes during that period so in an undergraduate class size of say 40 students, the total income from students per class taught is $100,000 for a class that meets perhaps three times a week.  This does not include the massive grants colleges receive which in many cases bring that number up to perhaps 150,000 per class if you divide it out that way.  As costs to attend college have risen, the ever compliant federal government doesn’t allow competition for students to take over, they have simply made student loans ridiculously easy to get, such that students are now spending hundreds of thousands on degrees which often times have no real function.   There even seems to be a new push to recognize some of the more useless and easy degrees by giving reduced payback requirements.  At some point we have to begin to question what is a reasonable cost for education, how much teaching should a professor actually do for his or her income.   For instance, the six figure income of Michael Mann is supported through ridiculously oversized grants for his sophomoric work, and he apparently is actually teaching for just 3 days per week and only for two semesters per year.  Yet the unreasonable people in politics continue to claim we don’t “invest” enough in education rather than noticing we are becoming dramatically less efficient at education.   The federal government is feeding both ends of the problem- loans and costs.

It seems cranially inverted to me, but then I’m not living in the shockingly sheltered world of infinite money in a US government university.  I live in the world of business where our products must provide a service, we must compete for that product to be accepted, and if we don’t provide more value than our cost, we go out of business.   Every minute of every day we work to provide our products and services at a better cost to more people.

The entire world is driven by incentivizations.   What I mean is that when you want less of something, you tax it and across the bulk of decision making made by the taxed, you get less of it.  When you want more of something you subsidize or cut taxes, and across the bulk of decision making you get more of it.  This applies on non-cost based decisions as well where positive and negative incentives drive decisions.  When the federal government provides large money to students with no assets that makes it easier to go into debt, they will carry more debt.  When universities raise tuition today due to incredibly lazy work environments, the federal government simply supports what would otherwise be a reduction in student attendance or pay cuts for professors with easier access to loans.  The problem is so severe that it is blatantly clear that the system has created a left-wing pro-government culture with massively overpriced services and equally massively underworked professors.  You get what you incentivize.

So I suppose Reich and I disagree on that but I’m off track a bit.  The movie was about the problem of income inequality, which itself is a false issue.  In the movie, Robert used the very poor unskilled workers and the very wealthy business investors as his examples, claiming that inequality is a huge issue.   The problems poor people in this movie face were obviously not due to the fact that the famous left-wing Warren Buffet made billions whatsoever.   You can redistribute all of the rich people’s money as China did, and the people who are poor will remain so, because there simply isn’t enough value to pass around. The problems the example individuals in the movie faced were not Buffets wealth but rather that they had too little money to have any visible opportunity for savings or any reasonable opportunity for a better life.   I’ve lived that way in the past myself where you must choose between food or new shoes and the $30 you have is all you are going to have for a long while.     When I hear about inequality, it makes me cringe because it has nothing to do with how much a CEO gets paid, it has to do with the VALUE of peoples time.    What does it cost to buy an hour of someones service on the open market. 

While there are plenty of things I can list that affect the cost of labor, the following major factors in the market are keeping the cost of our labor down:

  • Despite marginal economic improvement, supply of labor is still high relative to demand.
  • Working age people not contributing to availability of product and services.
  • Low cost of foreign labor.

These factors all affect the VALUE of a persons hour of work.

What happens to price of a good or service when supply goes up or demand goes down is something everyone knows, you get lower prices.   When supply is lower and demand is higher, prices go up.   The problem of wages is quite simple, supply and demand.   If you have excess labor in the workforce, real wages drop.

The second item above is a little more complex as a huge fraction of working age people in the US are not in or attempting to be in the workforce.  These people are typically not producing anything of value and are supported by government checks.  therefore do not contribute in a positive way to the economy, they become net drains and their negative influence keeps the availability of goods down and costs of goods higher while simultaneously consuming less themselves.  The available goods per functional employee must be a net positive as their consumption of goods is paid for by a fraction of what they produce.   In other words,  they must produce more value than they consume so non-working people are a net negative on the availability of goods driving up cost.

When we can purchase long term foreign labor for $3/hr and minimum real US labor cost of about $17, businesses must absolutely take advantage of this or the competitors will take you right out of the market.   This is not an effect of EVIL businessmen being greedy.  If the bottom line goes negative while trying to maintain competitive pricing, businesses are not governments, and they go bankrupt.   Often fairly quickly and with little fanfare.   In fact, businesses who do not seek out nearly every advantage go bankrupt all the time, and I have to tell you that this particular government with this president don’t give a fart what happens to my business or any other non-campaign contributing entity.   Our bankruptcy, which thankfully we are quite successful currently, wouldn’t even make the radar.

So this inequality the liberals are pounding on about is nothing but a recycled regressive Marxist redistribution style argument, that the poor people who work are not making enough and the rich make too much and it is the fault of the rich.   It is completely unfair and ridiculous to blame those like myself who work every weekend, evenings and early mornings, who are vastly more productive, create products of real value, should somehow not be compensated lavishly for successful results.   My partners and I certainly won’t be well compensated if we fail, hell we aren’t even allowed unemployment checks and we are the ones taking the risk.  Our employees won’t be terribly happy if we fail either.

But what about the ultra-wealthy.  The Trumps, Bloombergs and the Buffets of the world.   Certainly they hold too much value.   Robert Reich is of the opinion that they don’t spend enough.  They hold their money and THAT is somehow the problem with the world.   If they spent more (or perhaps were forced to spend or had their money taxed away), the money would flow more and the non-productive or low productivity people would be better off.   The false argument was made repeatedly that their tax rates were lower than any time in history, that despite their massive incomes, the taxes they paid were in the sub 15% range.   There is a lot to discuss about holding up the circulation of money, but it isn’t a zero net for the economy when it is stuck in a bank or re-invested in the stock market.  The argument Reich makes for taking money from the wealthy was incredibly oversimplified and completely wrongheaded.  Were releasing the cash such a big requirement for the economy, the giant piles of printed economic stimulus money which has never made it into the economy would be a solution rather than an inflationary ax waiting to fall on our economic necks.

While it is true that the wealthiest of investors reported taxes are that low, they are making the taxes through investment in corporations.  This gives the corporations operating cash to grow larger and these corporations gain value through various maneuvers which create profits.  Those profits are taxed at what I believe is the highest actual rate in the world today and any value remaining after tax causes the value of shares of the company to fluctuate up or down.  I’ll do some research on that rate and see if our tax leadership status has changed.   If profit goes down or negative news occurs, the investor loses their money, if it goes up, they gain value which if they are successful enough, and the stock prices perform, they can sell the stock for a profit on the corporations previously taxed profit and they receive a SECOND tax called capital gains — currently 20% of the amount gained.

Now think about this.  The money is taxed twice and only reported on the investors personal income FORM once, the rest of the influence of the invested money is taxed on the corporations tax return.  It makes the effective government tax collection rate on Warren Buffets money, higher than it appears to be on the investors balance sheet — but there is more.   Building a manufacturing company is difficult.  Our tax rate approaches 60% because of the dozens of layers of tax, our high growth, and the fact that certain things must be capitalized and depreciated.  In a growing company, the tax depreciation system creates a continuously increasing zero interest loan to the state and federal government based on unrealized income.  Despite the happy feelings that gives the high tax folk, you typically don’t get it back either as the company eventually will fail or be sold and fail later and there is no income against which you can depreciate the expense.  The result is simply that we have a tax rate which is much higher than is reported to the public.

More importantly, the capital gains tax is what is applied to a business being sold.   If the business gains value from the time of purchase to the time of sale, you pay capital gains on that increased value.  Keep in mind that the business has been paying at a 60% rate all along and then when sold, if it has anything of value to sell for, you are taxed a second time on the value of that sale.  Again, it is a second tax and certainly a large one considering what odds we face to keep a business from failing.

What does it do to the true stock value of a business if capital gains taxes on the sale of that stock are doubled? 

Will an increased capital gains tax encourage or discourage investment in US businesses?

Will reduced investment levels and the subsequent growth create more demand for employees?

Will income of the poorest people increase or decrease when there is less investment in the production of goods and services and less demand for jobs?

The answers to these questions are very clear, yet Robert Reich and many on the left don’t seem to want to grasp the situation.  Instead they attack a few high visibility billionaires ridiculous pay levels, or the fact that hedge fund managers are taxed on their income for other peoples investments at capital gains rates (the left is correct on fixing this item), but none of that IS the problem with the poor.  Nor will it make one scrap of positive help on the actual issue of the low end worker not having enough money.  Artificially propping up the bottom of the pay scale by minimum wage laws to levels almost nobody pays anyway, marginally decreases demand and subsequently marginally reduces the value of an employee’s time.  You get the opposite of the higher wages we all want.  It is also a non-solution to the real issue which is one of supply and demand for the low-skill employee.

Now we know from the cigarette and carbon tax fiasco’s that if we want more of something we tax it less or subsidize it (reduce the cost of the good or service) and if we want less, we tax it more (increase the cost of goods or services).  If you want to solve the low income problem (again the problem is not inequality), we need to as a country, commit to a stable pro-business reduced cost, tax, and regulation environment, such that people like myself (or perhaps you) who are crazy enough to take a ridiculous chance on starting a business, succeed at our efforts more often than we currently do.   What is better than that, and we see from the fact that the dollar continues to be reasonably strong, is that we don’t even have to be ACTUALLY good for business.  We just have to be better than much of the rest of the world, and the money will flow in to America in literal droves.   Demand for workers (especially skilled workers) will skyrocket.  Employers like myself will be forced by supply and demand to pay higher wages to keep our trained people.  The poor in America will continue to operate well above the median income of most of the rest of the world.

Now note, I said reduced cost and mentioned both tax and regulation.   Regulation favors the large company.  We struggled mightily with regulation when we were at the 20ish person employee level.   We are much larger now and can afford some of the additional costs of regulatory compliance but navigation of the rules is a massive burden on a corporation and this administration has added a very large additional burden for reporting, compliance, liability and necessary insurances to cover ourselves.  We talk regularly with 4 lawyers, and have multiple others we deal with.  All of these are costs, and while some is necessary, all costs are reductions in the  success level of American business and these costs often DO make the difference between success and failure.

Finally, the movie makes the point that we are at one of the lowest tax rates in the century.  Robert Reich put up a graph of the percentage paid by top earners for his proof.   The commentary which went with his graph can only be described as dishonest.   When deductions, and expenses are taken into consideration, America is at or near the highest percentage of collection rate our government has achieved.  I will take time before the election cycle to plot this again for people as I expect the lies on this subject to continue growing.  Taxes on the wealthy are currently high as deductions of expenses such as state tax or home interest are actually considered income on the federal tax. The situation is ridiculously convoluted and Reich owes his audience an apology for that dishonesty. The second tax reported on Warren Buffets personal return is not high, but again, it is not the whole story of taxes he contributes to our government by any means, the rest of his tax just lands on a different piece of paper.

This post has grown much longer than I intended but there is a lot of real information here.  I can write on about how regulation favors the ultra-wealthy and even high taxes on business capital gains favors billionaires who would definitely pay more.   The points I make above are facts as I know them.   It is extremely clear what it would take to increase the wages of the lowest earners, and it has not one thing to do with Marxist style redistribution.  We need more demand for employment and less strong government incentives for functional individuals to stay home and not contribute their available productivity.  Reduce some of the regulation on businesses, i.e. healthcare, environmental, employment liability, reporting requirements, tax complexity, capitalization taxes, and stop the added cost of insane EPA regulation on the energy industry —  and of course restructure taxes such that Americans get the best value for their money by investing here rather than holding money unused in other countries.

 

 

 

 

 

 

 

 

 

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